China is the world’s biggest supplier of tobacco products and source of most contraband shipments that reach many of Southeast Asia's estimated 122 million smokers

An unidentified cigarette vendor at China's Alcohol and Tobacco Fair held in Jiangxi province's city of Nanchang in March 2017. Photo: iStock/Getty Images

As Southeast Asian taxation experts met in Cambodia recently to discuss pricing policies to deter smoking, Malaysian maritime officers were intercepting a cigarette smuggling ring off Sabah that owed its existence to these same punitive measures.

Meanwhile, 500 workers were looking for new jobs in Malaysia after two of the country’s three cigarette factories phased out production, both partly blaming the “challenging” operating environment following steep government hikes in excise taxes.

Such is the dilemma faced by medical authorities as they look for ways to mitigate the enormous heath care burden of smoking within the region, conservatively estimated at US$9.2 billion a year without creating a new set of social and economic problems.

One in every five adults in Southeast Asia – 122 million people – was a smoker in 2015, the most recent available data, equivalent to 10% of the global market.

As many as one in every two cigarettes sold in some countries is contraband, providing plenty of temptation for smokers who were thinking of giving up. Singaporean smokers get their illicit supplies from Malaysia, where cigarettes are cheaper, but these probably originated in Indonesia, whose retail prices are even lower.

A woman holds a box of Sampoerna cigarettes produced by PT HM Sampoerna at a cigarette shop in Jakarta, Indonesia, August 1, 2017. Photo: Reuters/Beawiharta

China, easily the world’s biggest supplier of tobacco products, is the source of most contraband shipments that reach Southeast Asia. A recent report by the UN’s drugs agency on transnational crimes stated that cigarettes follow the same routes used to smuggle other contraband, including illicit narcotics and counterfeit goods.

Some consignments are slipped over porous borders in the north of Vietnam and trucked into a lightly patrolled zone between Vietnam and Cambodia. Others go directly from China to Thailand for transit to Malaysia, Indonesia and Singapore, as well as Mekong countries. A third route goes from China to Myanmar, and then onto South Asian nations.

Malaysia, Cambodia, Indonesia, Vietnam, the Philippines and Singapore are either smuggling transit points or final destinations. Cigarettes are transported on small boats from Indonesia to Malaysia and Brunei and then onto Thailand; the carriers are usually professional smugglers who also handle contraband petroleum gas, counterfeit medicines and other goods, often aided by corrupt government officials.

Studies by the World Trade Organization have found that smugglers are also able to skirt customs checkpoints by shipping cigarettes through free trade zones, especially in Singapore, Malaysia and the Philippines.

Singapore, Vietnam, Cambodia, Myanmar and Laos all rank near the bottom in a study on the effectiveness of policies against illicit trade in cigarettes compiled for the European Chambers of Commerce. There is little consistency in the way measures are levied in the region, limited cooperation between countries and regulatory disharmony, creating a pattern of disunity.

Thailand slaps a tax of up to 90% on every packet of cigarettes, Singapore 66.2% and Brunei 62%. Countries like Cambodia (25%-31.1%) and Laos (16%-19.7%) are yet to catch up, leaving a pricing gap that merely feeds the appetite of smuggling syndicates.

Markets also levy different rates of sales tax, ranging from 12% in the Philippines and 10% in Cambodia and Vietnam, to 6% in Malaysia and nothing at all in Myanmar. Cambodia, Myanmar and Vietnam have ad valorem taxes and Thailand and Laos operate mixed tax systems. There are wide variations in penalties and the way taxes are interpreted.

Cigarette prices have consistently climbed in Brunei since 2008, but have either fallen or are little changed in other markets. The biggest declines have been in Laos, the Philippines and Vietnam, which are some of the fastest-growing markets for tobacco products.

Brunei, Cambodia, Malaysia, Myanmar, Vietnam and Indonesia have no code of conduct or other policy governing tobacco controls, which is a basic requirement of the World Heath Organization. This has made it harder to enforce anti-smuggling rules and even encouraged corruption in countries like Myanmar, where taxes often aren’t collected.

Laos has a policy but no code of conduct or other guidelines; the Philippines, Thailand and Singapore have codes of conduct but no official policies. In the Philippines, the absence a policy framework has led to enforcement problems.

Buyers and sellers at China’s Nanchang Tobacco and Alcohol Fair in a March 2017 file photo: Photo: iStock/Getty Images

While most cigarettes are contraband, there is also a significant trade in counterfeit products that carry legitimate trademarks but contain inferior tobacco. Others are sold in a “grey” market where licit products are illegally diverted into other markets.

Nobody is sure how much the contraband trade is worth, but it is estimated that governments worldwide lose at least US$50 billion a year in potential tax revenues. The Philippines, one of the biggest Southeast Asian markets, puts its losses at US$317 million annually.

Indonesia, Singapore, Thailand, Malaysia, Vietnam, Cambodia, the Philippines and Myanmar earned US$2.3 billion from exports of tobacco products in 2016, or 10% of the global trade. In Thailand and Vietnam most of this cash went to government agencies which own 70.2% and 55.3% respectively of their leading tobacco firms, thus creating a conflict of interest with health objectives.

Studies by the Southeast Asia Tobacco Control Alliance, which is pushing for more consistent taxing policies throughout the region, suggest that raising excise duties can reduce the prevalence of smoking and lift revenues enough to cover losses from smuggling.

A cigarette burns in a May 11, 2017 photo. Photo: Reuters/Jason Reed

In Thailand, the number of smokers fell from 32% of the adult population to 21.4% from 1991-2012 after the rate of excise duty was raised 11 times; government revenues rose almost fourfold. A similar trend was reported in the Philippines in 2008-2013.

Of course, higher revenues will be needed to cover the economic costs of smoking, which will continue to spiral even if pricing policies succeed in reducing consumption. Indonesia’s economy is expected to lose US$4.5 trillion by 2030 from tobacco-related diseases, including lower productivity and disabilities.

Contraband cigarettes are not going to disappear, either, as the smugglers will take advantage of streamlined customs procedures under the Association of Southeast Asian Economic Community (AEC) to expand into new markets through regular trade routes.

The same people who smuggle cigarettes to Southeast Asia often are also involved in the trafficking of humans, narcotics, animals and other contraband, and – in the Middle East at least – are helping to bankroll extremist activities by Islamic terrorist cells.

Putting a price on the economic consequences of these activities will be an even more taxing problem for revenue authorities.